Bond Law Review Volume 26 | Issue 1 Article 4 2015 Private securities litigation in China: Passive people's courts and weak investor protection Jin Sheng Follow this and additional works at: hp://epublications.bond.edu.au/blr is Article is brought to you by the Faculty of Law at ePublications@bond. It has been accepted for inclusion in Bond Law Review by an authorized administrator of ePublications@bond. For more information, please contact Bond University's Repository Coordinator. Recommended Citation Sheng, Jin (2015) "Private securities litigation in China: Passive people's courts and weak investor protection," Bond Law Review: Vol. 26: Iss. 1, Article 4. Available at: hp://epublications.bond.edu.au/blr/vol26/iss1/4
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Bond Law Review
Volume 26 | Issue 1 Article 4
2015
Private securities litigation in China: Passivepeople's courts and weak investor protectionJin Sheng
Follow this and additional works at: http://epublications.bond.edu.au/blr
This Article is brought to you by the Faculty of Law at ePublications@bond. It has been accepted for inclusion in Bond Law Review by an authorizedadministrator of ePublications@bond. For more information, please contact Bond University's Repository Coordinator.
Recommended CitationSheng, Jin (2015) "Private securities litigation in China: Passive people's courts and weak investor protection," Bond Law Review: Vol.26: Iss. 1, Article 4.Available at: http://epublications.bond.edu.au/blr/vol26/iss1/4
Private securities litigation in China: Passive people's courts and weakinvestor protection
AbstractThis article addresses remedies for defrauded public investors in the Chinese legal system and the passiveattitude of China’s courts to private securities litigation. Despite the existing laws in China prohibitingsecurities fraud, the absence of an efficient enforcement regime leaves shareholders vulnerable to a wide rangeof abuses. Weak legal remedies for victims of securities fraud, especially poor law enforcement and judicialgovernance, have led to a waste of judicial resources. In particular, China’s courts have adopted a passiveattitude to securities disputes (typically prior to 2003, when the courts were absent in dealing with privatesecurities actions), although this situation is changing gradually. This article analyses procedural reforms suchas shareholders’ derivative actions, class actions and shifting evidential proof for defendants. Judicial practicesin securities fraud, including false statements, market manipulation and insider trading, are also addressed.This article then highlights the importance of establishing an active and independent system of legalenforcement for the protection of investors. In conclusion, it suggests introducing class actions, the inversionof the burden of proof and facilitating private remedies for individual shareholders by enhancing judicialreview, judicial independence and judicial governance.
PRIVATE SECURITIES LITIGATION IN CHINA: PASSIVE PEOPLE’S COURTS AND
WEAK INVESTOR PROTECTION
In this respect, the Notice of the Supreme People’s Court on Issues Concerning the
Acceptance of Civil Compensation Cases Arising from False Statements in the Securities
Market (2002) ( the ‘2002 Notice’) is a landmark development.15 The 2002 Notice
opened the door to civil compensation for the victims of securities frauds in China.
The 2002 Notice made civil actions concerning false statements admissible with pre‐
action administrative penalties enforceable by the China Securities Regulatory
Commission (‘CSRC’).16 On 9 January 2003, the Supreme Court issued the Notice of
Certain Issues on the Admission of Civil Tort Dispute Cases Concerning False Statements in
the Securities Market (2003) (the ‘2003 Judicial Interpretation’). The 2003 Judicial
Interpretation came into effect on 1 February 2003 and further developed a trial basis
for Chinese courts dealing with civil litigation concerning false statements related to
securities.
The lack of provisions creating legal liabilities for securities torts in both the PRC
Company Law and the PRC Securities Law has clearly increased difficulties in the trial
of private securities litigation, and these difficulties have been exacerbated by
procedural issues associated with the burden of proof and the acceptance of cases.17
The consequences of violating the PRC Securities Law, which are set out in 36 articles
in the 2004 Amendment18 and 48 articles in 2005 and 2014 Amendments,19 include
criminal liabilities, administrative sanctions, administration fines and civil liability.
As a matter of fact, only one article concerns civil compensation. It states: ‘Where
anyone violates the present Law and shall be subject to civil liabilities of
compensation and payment of fines and penalties, and if his properties are not
sufficient to cover all the payment at the same time, he shall bear civil liabilities.’20 In
15 See 《最高人民法院关于受理证券市场因虚假陈述引发的民事侵权纠纷案件有关问题的通
知》 [Notice of the Supreme People’s Court on Issues Concerning the Acceptance of Civil
Compensation Cases Arising from False Statements in the Securities Market] (People’s Republic
of China) Supreme People’s Court, 15 January 2002. 16 China Securities Regulatory Commission (CSRC) is the regulator of China’s securities
and futures markets. The commission is authorised by the State Council to regulate
China’s securities and futures market. 17 李国光[Guoguang Li], 《在上海投资者保护国际研讨会上的讲话》[Speech on Practices,
Problems and Prospect of China’s Securities Litigation at the International Seminar of
Investor Protection in Shanghai] (20 June 2002), in 李国光，贾纬［Guoguang Li and Wei
Jia] ed., 《证券市场虚假陈述民事赔偿制度》 [Civil Compensation System Concerning
False Statements on the Securities market] (法律出版社[Law Press], 2002), 264–9. 18 See art 175‐210, the PRC Securities Law (1999 and 2004 amendment). 19 See art 188–235, the PRC Securities Law (2005 and 2014 amendments). 20 See art 209, the PRC Securities Law (1998, 2004 amendment), and art 232, the PRC Securities
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reality, victims of securities fraud were not permitted to file civil cases prior to 2002;
even if courts opened the door to civil compensation concerning false statements, the
Supreme People’s Court set a criminal judgment or an administrative decision as a
procedural prerequisite. That is, civil compensation was possibly placed after
criminal fines or administrative fines in practice. The 2003 Judicial Interpretation made
it possible for investors to seek legal remedies for false statements. Later, civil actions
concerning insider trading became available for individual victims, although
difficulties associated with filing a case and collecting evidence, and the time‐
consuming nature of successful litigation, have not fundamentally changed due to
substantive and procedural flaws in the current system, the often inadequate
professional quality of judges and local government interference.21 The Supreme
People’s Court is still drafting judicial interpretations for market manipulation. The
CSRC has made administrative decisions concerning cases such as Yanjun Chen et al v
Zhejiang Hang Xiao Steel Structure Co Ltd,22 but thousands of victims of affiliated
transactions and market manipulation have to wait to begin compensatory lawsuits.
Additionally, the Supreme People’s Court initiated research on judicial
interpretations of the PRC Securities Law in 2006.23
In addition, law enforcement related to securities disputes is still an area of
uncertainty in China. According to Pistor and Xu, the more incomplete the law, the
more residual legislative rights are allocated between ‘lawmaking and law
enforcement powers (LMLEP)’. 24 When the government has an overwhelmingly
strong influence in legislation and law enforcement, the courts have a very limited
Law (2005, 2014 amendment).
21 沈丽[Li Shen], 《证券民事赔偿诉讼难的现状及对策》[Present Situation and Solutions on
Difficulties of Securities Civil Compensation] (2010) 《南方金融》 [South China Finance] Vol.
<http://finance.sina.com.cn/stock y/20081209/03515608178.shtml> (accessed Nov 7, 2014). 27 ‘Tunneling’, also referred to as ‘self–dealing’ or ‘investor expropriation’ is defined by
Johnson et al (2000) as ‘the transfer of resources out of a company to its controlling
shareholder’. See Simon Johnson, Rafael La Porta, Florencio Lopez–de–Silanes & Andrei
Shleifer, ‘Tunneling’ (2000) 90(2) The American Economic Review 22, 22–3. Aside from the
‘tunneling of assets and profits’, tunneling may also be realised through the ‘taking of
corporate opportunities’; ‘executive perquisites to excessive compensation’; ‘over–
investment in pursuit of growth’; ‘private benefits of control’; ‘transfer pricing’ and
‘expropriating minority shareholders through financial transactions’. See also Simon
Johnson, Rafael La Porta, Florencio Lopez–de–Silanes & Andrei Shleifer, ‘The Law and
Economics of Self–Dealing’ (2008) 88(3) Journal of Financial Economics 430, 430. 28 午言 [Yan Wu]《人民日报：股市民事赔偿何时不再难》[People’s Daily: When Will
Securities Civil Compensation Be No Longer Difficult] (1 August 2011) 人民日报 [People’s
Daily] <http://news.xinhuanet.com/finance/2011‐08/01/c_121752732.htm> (accessed Nov 5,
2014). 29 The CSRC made a survey of 1,175 listed companies at the end of 2002 and found that
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PRIVATE SECURITIES LITIGATION IN CHINA: PASSIVE PEOPLE’S COURTS AND
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capital raised from both A‐share and B‐share markets in that year.30 Although the
CSRC enhanced monitoring measures to prohibit controlling shareholders from
illegally misappropriating the capital of listed companies, the numbers were still ￥
57.7 billion in 2003, ￥50 billion in 2004, and ￥48 billion by June 2005.31 In the first six
months of 2006, the amount of capital misappropriated by controlling shareholders
was ￥31.57 billion in 147 listed companies (including 88 state owned and 59
privately operated listed companies).32 Such misappropriation has seriously affected
the business operation of involved listed companies and violated the interests of
minority shareholders. However, it would appear that China’s public investors
suffered losses over and above those identified by the CSRC. It is estimated that less
than 10% victims of false statements brought lawsuits and their subject matter
amounts accounted for no more than 5% of the total loss.33
Compared with administrative penalties for securities frauds, civil compensation for
individual investors is quite low. It has been reported that, as of 2006, twenty listed
companies violated securities laws and paid only ￥5,000,000 to nearly 300 investors
in civil compensatory actions in China. 34 In other words, the average cost for
securities frauds in terms of civil compensation was only ￥250,000 for each violation.
However, from 1999 to 2002 the CSRC conducted 192 cases and extended
large shareholders misappropriated ￥96.7 billion in 676 listed companies. See 谢卫军
[Weijun Xie], 《从治理结构缺陷透析上市公司道德风险》[Analysis on Moral Risk in Listed
Companies by Flaws of Corporate Governance] (19 January 2007) 《商务周刊》 [Business
Weekly] <http://finance.sina.com.cn/stock/t/20070119/13173263795.shtml>. 30 Refer to statistic data of CSRC, <http://www.csrc.govcn>. The total amount of traded
market value was about ￥1.25 trillion in 2002; the sum of raised capital was ￥96.138
billion. 31 余珂 [Ke Yu], 《证监会副主席重申年内解决上市公司资金占用问题》[Vice President of
CSRC Readdresses to Solve the Capital Misappropriation of Listed Companies in the Year
of 2006] (28 February 2006) 《经济日报》[Economic Daily] <http://www.govcn/jrzg/2006‐
02/28/content_213113.htm> (accessed Nov 12, 2014). 32 严整[Zheng Yan], 《上市公司利益沖突研究》[Study on the Conflict of Interest in Listed
Companies] (PhD Thesis, Southwest University of Finance & Economics, 2007) 91. 33 刘俊海，宋一欣[Junhai Liu and Yixin Song] ed, 《中国证券民事赔偿案件司法裁判文书汇
编》[The Court’s Judgments Collection of Civil Compensation Cases in Securities in China] (北
<http://www.grandall.com.cn/newsroom/media‐coverage/440.htm>. 55 李凡诉黑龙江圣方科技股份有限公司诉讼案》[Fan Li v Sunfield Science & Technology], 哈尔
滨市中级人民法院 [Heilongjiang Province Ha’erbin Municipal Intermediate People’s
Court, People’s Republic of China], 2004. The civil compensation case against Shengfang
Sci & Tech took 12 years. 刘雯亮[Wenliang Liu],《民事赔偿 12年漫漫征途 证券维权团队负
重前行》[A Civil Compensation May Take 12 Years; Securities Rights Team Matched with
Heavy Loads] (11 May 2013) 证 券 时 报 网 [Securities Times],
<http://epaper.stcn.com/paper/zqsb/html/2013‐05/11/content_469550.htm >. 56 See art 135, 《民法通则》[the PRC General Principles of the Civil Law] National People’s
Congress, 12 April 1986, amended in 2009 and 2014. 57 阎皂定等诉广夏（银川）实业股份有限公司》[Zaoding Yan et al v Guang Xia (Yinchuan)
Industry CoCo, Ltd – False Statement Dispute Case], 宁夏银川中级人民法院 [Yinchuan
[Shareholder Derivative Action—The Sword of Damocles] (1 September 2011)
<http://www.sunnada.com/?p=479 >. 72 中华人民共和国公司法》[Company Law of People’s Republic of China] National People’s
Congress 29 December 1993, amended in 1999, 2004, 2005 and 2013. 73 Federal Rules of Civil Procedure USCA. § 1332(d) (2014), rr 23, 28. 74 Civil Procedure Rules 1998 (UK), r 19.6. 75 Federal Courts Rules SOR/98‐106, rr 334.1–334.4. 76 Federal Court of Australia Act 1976, pt IVA. 77 High Court Rules 2008 (NZ) SR 2008/80, r 4.24. 78 最高人民法院关于受理证券市场因虚假陈述引发的民事侵权纠纷案件有关问题的通知》
[The Notice of the Supreme Peopleʹs Court on the Relevant Issues concerning the Acceptance of
Cases of Disputes over Civil Tort Arising from False Statement in the Securities Market]
(People’s Republic of China) Supreme People’s Court, 15 January 2002, art 4. 79 中南大学法学院课题组[Research Group of Central South University Law School], 《美国
证券集团诉讼法研究》[A Study on the Securities Class Litigations in the United States]
111
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China’s judicial system faces many insurmountable obstacles due to the absence of
class actions, which are seriously detrimental to securities legislation.80 From 1990 to
May 2013, about 15,000 investor plaintiffs in false statement cases claimed
approximately ￥1.5 billion. However, most of these cases were tried in the form of
individual litigation; the others were tried in the form of joint litigation.81 In practice,
the repetitive filing of similar cases is a waste of time and money for plaintiffs and
defendants. For example, in the civil compensation against Guang Xia (Yinchuan)
Industry Co Ltd, more than 100 lawsuits were filed at the Yinchuan Intermediate
court by August 2004.82 Moreover, small awards of compensation and inefficient
enforcement disadvantage individual investors in China.
Private securities litigation may take the form of group litigation. According to
China’s Supreme People’s Court, ‘group litigation’ refers to situations where either
side involves more than ten people. Also, the plaintiff of securities litigation can select
either individual action or joint action.83 Courts may combine two or more cases, which have
the same facts and defendant(s), into joint litigation. Joint litigation can be conducted through
representative action. The acts of such representatives in the litigation shall be valid for
the party they represent, although modification or waiver of claims or admission of
the claims of the other party or pursuing a compromise with the other party shall be
report0064.pdf >. 81 刘俊海，宋一欣[Junhai Liu and Yixin Song] ed., 《中国证券民事赔偿案件司法裁判文书汇
编》[The Court’s Judgments Collection of Civil Compensation Cases in Securities in China] (北
京大学出版社 [Peking University Press], 2013), 19. 82 刘呈军[Chengjun Liu], 《银广夏涉案标的激增 立案标的达 1.8 万亿元》[The Object of
Litigation in the Case of Yin Guang Xia Increases up to ￥1.8 Trillion] (18 August 2004) 中华工
商时报[China Business Times] <http://finance.sina.com.cn/t/20040818/0158955827.shtml>. 83 Individual action is the counterpart of joint action. The latter concerns the same subject
matter of the action or under the same category when both parties consist of an
individual party. ‘Joint litigation’ refers to litigation whereby ‘one party or both parties
consist of two or more persons and the subject matter of the action is the same or under
the same category, the People’s Court may adjudicate them together upon the consent of
all the parties.’ See 《中华人民共和国民事诉讼法》 [Civil Procedure Law of the People’s
Republic of China] (People’s Republic of China) National People’s Congress, 9 April 1991,
art 53.
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subject to the consent of the party they represent.84 However, the Chinese representative
action, in the context of securities in China, is quite different from a class action, and has
several disadvantages.
First, unlike in a class action, the decision of private securities litigation does not apply to
those who do not join the joint action. According to the PRC Civil Procedural Law,
representative litigation can be divided into representative lawsuits with exact
numbers of litigants and representative lawsuits without exact numbers of litigants.85
However, under China’s joint litigation or representative litigation, the exact number of
litigants in a joint litigation must be determined prior to the trial.86 If the number of litigants is
not certain when the lawsuit is filed, the People’s Court may issue a public notice informing
interested persons (who are entitled to a claim) to register with the court within a fixed
period.87 The settlement only applies to registered litigants and those who have instituted legal
proceedings during the time of the said notification period.88 Once a trial commences, the
exact number of plaintiffs and defendants is fixed and the any settlement only applies to
registered and eligible litigants. This means that the settlement cannot be expanded to apply to
investors who have not registered with representative litigation.89
Secondly, the 2003 Judicial Interpretation allows a party with a large number of litigants to
authorize 2 to 5 representatives to deal with joint litigation.90 However, plaintiffs may not be
able to reach an agreement in selecting or electing representatives. In the case of Xiaomei Cao
84 See 《中华人民共和国民事诉讼法》 [Civil Procedure Law of the People’s Republic of
China] (People’s Republic of China) National People’s Congress, 9 April 1991, art 54. 85 Article 54 of the PRC Civil Procedural Law (1991) stipulates representative litigation with
exact numbers of litigants. Article 55 of the PRC Civil Procedural Law (1991) stipulates
representative litigation without exact numbers of litigants. See also《最高人民法院关于
适用《中华人民共和国民事诉讼法》若干问题的意见》[Opinions of the Supreme Peopleʹs
Court on Several Issues Concerning the Application of the Civil Procedure Law of the People’s
Republic of China] (People’s Republic of China) Supreme People’s Court, Fa [1992] No. 22,
14 July 1992, art 60 and 61. 86 See 《关于受理证券市场虚假陈述案件的通知》 [Notice of the Supreme People’s Court on
Issues Concerning Acceptance of Civil Compensation Cases Arising from False Statement
in Securities Market] (People’s Republic of China) Supreme People’s Court, 15 January
2002, art 14. 87 中华人民共和国民事诉讼法》 [Civil Procedure Law of the People’s Republic of China]
(People’s Republic of China) National People’s Congress, 9 April 1991, art 54. 88 Ibid art 55. 89 Ibid art 54. 90 最高人民法院关于审理证券市场因虚假陈述引发的民事赔偿案件的若干规定》[Some
Provisions of the Supreme Peopleʹs Court on Trying Cases of Civil Compensation Arising from
False Statement in Securities Market] Supreme People’s Court, 9 January 2003, art 14.
113
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v Dongfang Electronics Co Ltd,91 there are more than 6,800 plaintiffs. Even if plaintiffs elect
representatives, it is possible that representatives will be involved in conflicts with plaintiffs
during the action. The substitution of representatives, and the acceptance, change and
relinquishing of claims of the opposing party should be approved by the plaintiffs to the
action.92 Quite often, a large number of individual plaintiffs cannot reach an agreement on
certain substantial or procedural issues. 93 Assuming some plaintiffs will disagree with
decisions made by representatives, how can these opposing plaintiffs change their
representatives? The current civil procedural law or judicial interpretation does not provide
any instructions. The plaintiffs may take considerable time seeking compromise.
Thirdly, filing the same case in different courts may lead to different results, casting doubt
upon the consistency of law enforcement and resulting in a waste of judicial resources. In the
two years after the Supreme People’s Court issued the 2002 Notice on the admission
of securities litigations, Chinese courts accepted approximately 1,700 securities
lawsuits.94 For this reason, among others, many legal scholars, such as Hu,95 Yang,96 and
Ren,97 have strongly argued for the introduction of class actions in China’s civil procedural
system. In the future, the courts should introduce class actions for securities lawsuits in order
to reform the current Chinese civil procedural system.
91 曹小妹等诉烟台东方电子信息产业股份有限公司》[Xiaomei Cao et al v Dongfang Electronics
Co, Ltd], 山东省青岛市中级人民法院 [Shandong Qingdao Municipal Intermediate
People’s Court, People’s Republic of China], 2006. 92 中华人民共和国民事诉讼法》 [Civil Procedure Law of the People’s Republic of China]
(People’s Republic of China) National People’s Congress, 9 April 1991, art 54. 93 吴英姿[Yingzi Wu], 《代表人诉讼制度设计缺陷》[The Design Flaws of the Representative
20021127/875535.html> (accessed 14 November 2014). 106 彭淼秋诉上海嘉宝实业（集团）股份有限公司案》 [Miaoqiu Peng v Shanghai Jiaobao
Industry & Commerce CoCo, Ltd], 上海市第二中级人民法院 [The 2nd Intermediate People’s
Court of Shanghai Municipality, People’s Republic of China], 沪二中民三(商)初字第 53号
[Civil Case No 53], 5 November 2002. 107 杨金志,郁文艳[Jinzhi Yang & Wenyan Yu], 《ST嘉宝虚假陈述案结案 大部分原告获得赔偿》
[The False Statement Case of ST Jiabao has been Fully Adjudicated; Most Plaintiffs Got
116
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(ii) In Lingpei Zhang v Chengdu Hong Guang Industry Co Ltd,108 the
plaintiffs reached a settlement with the listed company and the
underwriter.109
(iii) In Fan Li v Sunfield Science & Technology,110 the case ended with
conciliation. The defendant agreed to pay the plaintiff’s claims for the
loss of investment balance, stamp duty and commission.111
(iv) The case of Guoming Dong et al v Jinzhou Port Co Ltd 112 also ended
with conciliation in on 12 April 2005.113
(v) In the lawsuit against Jinan Qingqi Motorcycles Co Ltd,114 filed in
September 2003 and resolved at the beginning of 2006, the plaintiffs
got 80% of what they claimed. The compensation payment was
relatively high compared to other securities actions.115
Compensations] (27 January 2003) 新 华 网 [Xinhua Net]
<http://finance.sina.com.cn/roll/20030128/0833307127.shtml>. 108 张玲培诉红光实业等虚假陈述民事侵权赔偿纠纷案虚假陈述民事赔偿案》 [Lingpei Zhang v
Chengdu Hong Guang Industry Co Ltd et al – False Statement Compensation Dispute], 四川
省成都市中级人民法院 [Sichuan Province Chengdu Municipal Intermediate People’s
Court, People’s Republic of China], 成民初字第 862号[Civil Case No 863], 25 November
2002. 109 刘俊海，宋一欣[Junhai Liu and Yixin Song] ed., 《中国证券民事赔偿案件司法裁判文书汇
编》[The Court’s Judgments Collection of Civil Compensation Cases in Securities in China], (北
京大学出版社 [Peking University Press], 2013), 385–6. 110 李凡诉黑龙江圣方科技股份有限公司诉讼案》[Fan Li v Sunfield Science & Technology], 黑龙
江哈尔滨市中级人民法院 [Heilongjiang Province Ha’erbin Municipal Intermediate
People’s Court, People’s Republic of China], 2004. 111 刘俊海，宋一欣[Junhai Liu and Yixin Song] ed., 《中国证券民事赔偿案件司法裁判文书汇
编》[The Court’s Judgments Collection of Civil Compensation Cases in Securities in China], (北
京大学出版社 [Peking University Press], 2013), 37–8. 112 董国明等诉锦州港股份有限公司诉讼案》 [Guoming Dong et al, v Jinzhou Port CoCo, Ltd], 辽
宁省沈阳市中级人民法院 [Liaoning Province Shenyang Municipal Intermediate People’s
Court, People’s Republic of China], 沈中民(3)权初字第 20号 [Civial Case No 20], 2003. 113 Ibid 42–5. 114 陈华妹等诉济南轻骑虚假陈述民事赔偿案》[Huamei Chen et al v Jinan Qingqi Motorcycles Co
Ltd], 山东省济南市中级人民法院[Shandong Province Jinan Municipal Intermediate
People’s Court, People’s Republic of China], 2006. 115 宋一欣 [Yixin Song], 《我所知道的济南轻骑民事赔偿案》[What I Have Known about the
Civil Compensation Case of Jinan Qingqi] (26 October 2006) 中国证券网 [China Securities
(accessed 16 November 2014). 120 Sina Finance, 《广誉远中药股份有限公司 (600771)》 [GuangYuYuan Chinese Herbal
Medicine Co Ltd] <http://money.finance.sina.com.cn/corp/go.php/vCI_CorpInfo/stockid/
600771.phtml> (accessed 16 November 2014). 121 張安基[Anji Zhang] 《42 家上市公司因虚假陈述或成被告》[42 Listed Companies May
118
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case, conciliation clearly has the advantage of saving time and costs for both parties
rather than going through a second‐instance hearing. Therefore, judges often
encourage conciliation so as to reduce the costs of litigation both for benefit of the
parties and of society.
III PRIVATE LITIGATION OF SECURITIES DISPUTES
This section examines the litigation mechanism of three categories of securities fraud:
false statement, insider trading and market manipulation. The Supreme People’s
Court has still to enact a unified judicial interpretation to cover jurisdiction, forms,
parties, burden of proof, causation and calculation of loss of private securities
litigation. So far, only the 2003 Judicial Interpretation on false statement has been
implemented.
A Private Litigation of False Statements
False statements concern the disclosure of information in contravention of securities
laws and regulations through the creation of false records, misleading statements
related to major events, improper disclosure, or omission of relevant statements,
during the process of issuance and transaction of securities. China’s information
disclosure system includes three levels: Stipulations of the Securities Law, CSRC’s
administrative regulations and stock exchange’s rules. False statements are regulated
by ch 3 s III of the PRC Securities Law, titled ‘On‐going Disclosure of Information’,
and the relevant judicial interpretations of the Supreme People’s Court.122
In China, media exposure of many cases of misrepresentation and false financial
statements in 2000 prompted the CSRC to strengthen legal regulation to enhance
disclosure of information in the securities market. In particular, the Measures for the
Administration of Disclosure of Shareholders Equity Changes of Listed Companies
(‘Measures’) came into force on 1 December 2002. 123 The Measures referred to
situations in which:
Become Defendants Due to False Statement] (1 April 2009) 每日经济新闻 [Daily Economic
News] <http://money.163.com/09/0401/04/55PMS2PL00251RJ2.html>. 122 中华人民共和国证券法》 [Securities Law of the People’s Republic of China] (People’s
Republic of China) National People’s Congress, 29 December 1998, art 63–72. 123 上市公司股东持股变动信息披露管理办法》[Measures for the Administration of Disclosure of
Shareholder Equity Changes of Listed Companies] (People’s Republic of China) CSRC, 28
September 2002.
119
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(i) shareholders’ equity has changed or may have been changed through
dealings in the securities market;
(ii) the number of shares controlled by a certain investor has changed; or
(iii) the structure has been changed through legal means other than
dealings in the securities market.
Moreover, to standardize disclosure of information in relation to listed companies,
the CSRC promulgated a series of legal document formats, 124 which provided
elaborate instructions for public announcements and disclosure reports. Together
with the Interim Provisions on the Management of the Issuing and Trading of Stocks,125
these formats (or rules) developed a legal framework for the disclosure of
information related to takeover bids. This development represented considerable
progress over existing legislation. Moreover, special disclosure liabilities were
required by the CSRC’s series Preparation Rules for Information Disclosure by Companies
Offering Securities to the Public (No. 1-26). To enhance its regulation on information
disclosure, the CSRC issued Administrative Measures for the Disclosure of Information of
Listed Companies in 2007.126
Aside from issues of forms of litigation, burden of proof and settlement as discussed
above, the 2003 Judicial Interpretation highlights the following aspects:
1 Procedural Prerequisite and Jurisdiction
Investors must bring a private securities lawsuit on the ground of either a relevant
administrative penalty decision by the CSRC, Ministry of Finance or other
administrative authorities, or an effective criminal judgment made by the People’s
Court. 127 This stipulation is called as ‘procedural prerequisite of securities civil
124 These formats are stipulated in Rules 15–19 of the Circular of the China Securities Regulatory
Commission on the Content and Format of Information Disclosure of Public Listed Companies
(2002). 125 股票发行与交易管理暂行条例》［Interim Provisions on the Management of the Issuing and
Trading of Stocks］People’s Republic of China）the State Council, 22 April 1993. 126 上市公司信息披露管理办法》［Administrative Measures for the Disclosure of Information of
Listed Companies］(People’s Republic of China) China Securities Regulatory Commission,
30 January 2007. 127 最高人民法院关于审理证券市场因虚假陈述引发的民事赔偿案件的若干规定》 [Certain
Provisions of the Supreme Peopleʹs Court on Trial of Civil Compensation Cases Arising from
False Statement in Securities Market] (People’s Republic of China) Supreme People’s Court,
9 January 2003, art 6.
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litigation’. The jurisdiction of such cases is ‘the intermediate peopleʹs court of the city
where the peopleʹs government of the province, municipality directly under the
Central Government, autonomous region is located, of the city directly under state
planning or of the special economic zone’.128
2 The Defendants
A relatively large range of defendants are defined under Chinese law. Violators
(relating to false statements) include:
(i) sponsors, controlling shareholders and other actual controllers;
(ii) issuers or listed companies;
(iii) underwriters;
(iv) recommenders;
(v) accounting firms, law firms, asset evaluation agencies and other
intermediary agencies;
(vi) senior management such as directors, supervisors and managers of
the aforesaid items (ii), (iii) and (iv), and the person taking direct
responsibility of the aforesaid item (v); and
(vii) other agencies or individuals who make false statements.129
3 Principles of Liability
Violators may bear joint liability due to certain circumstances.130 Liability for false
statements for wrongdoers may arise in a number of ways:
(i) the sponsor, issuers or listed company shall bear the liability for civil
compensation for the losses caused by their false statement to the
investors;131
128 Ibid art 8. 129 Ibid art 7. 130 Ibid, refer to art 26–28. 131 See 《中华人民共和国证券法》 [Securities Law of the People’s Republic of China]
(People’s Republic of China) National People’s Congress, 29 December 1998, art 63, 69;
see also 《最高人民法院关于审理证券市场因虚假陈述引发的民事赔偿案件的若干规定》
[Certain Provisions of the Supreme Peopleʹs Court on Trial of Civil Compensation Cases Arising
from False Statement in Securities Market] (People’s Republic of China) Supreme People’s
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(ii) the responsible director, supervisor, senior manager or any other
person of the issuer or the listed company shall bear the joint liability
for compensating the losses, unless there is evidence to prove that
they have no fault;132
(iii) the actual controller shall bear the liability for compensation. The
issuer and listed company shall be jointly and severally liable with
the actual controller;133
(iv) the securities underwriter or the person recommending the listing of
securities shall bear the liability for compensating the losses caused
by his false statement to the investors, unless there is evidence to
prove that he has no fault;134
(v) senior managing members such as the liable board directors,
supervisors and managers, etc. shall bear the joint liability for
compensation with the securities underwriter or the person
recommending the listing of securities;135
(vi) the professional intermediary agencies and their direct responsible
persons shall assume the liabilities for compensation for the part, of
the losses, caused due to their liabilities, unless there are evidences
proving the innocence of the aforesaid personnel;136 and
Court, 9 January 2003, art 21.
132 See 《中华人民共和国证券法》 [Securities Law of the People’s Republic of China] (People’s
Republic of China) National People’s Congress, 29 December 1998, art 69; see also 《最高
人民法院关于审理证券市场因虚假陈述引发的民事赔偿案件的若干规定》 [Certain
Provisions of the Supreme Peopleʹs Court on Trial of Civil Compensation Cases Arising
from False Statement in Securities Market] (People’s Republic of China) Supreme People’s
Court, 9 January 2003, art 21. 133 See 《中华人民共和国证券法》 [Securities Law of the People’s Republic of China] (People’s
Republic of China) National People’s Congress, 29 December 1998, art 69; 《最高人民法院
关于审理证券市场因虚假陈述引发的民事赔偿案件的若干规定》 [Certain Provisions of the
Supreme Peopleʹs Court on Trial of Civil Compensation Cases Arising from False Statement in
Securities Market] (People’s Republic of China) Supreme People’s Court, 9 January 2003,
art 22. 134 最高人民法院关于审理证券市场因虚假陈述引发的民事赔偿案件的若干规定》 [Certain
Provisions of the Supreme Peopleʹs Court on Trial of Civil Compensation Cases Arising from
False Statement in Securities Market] (People’s Republic of China) Supreme People’s Court,
9 January 2003, art 23. 135 Ibid. 136 The civil liabilities of accounting firms, law firms, asset evaluation agencies and other
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(vii) Where other institutions or natural persons making the false
statement as mentioned in Item 7 of Article 7 of these Provisions, in
violation of Article 5, 72, 188 and 189 of the Securities Law, cause
losses to the investors, they shall assume the liabilities for
compensating such losses.137
4 Causation Between False Statement and Loss
Article 18 of the 2003 Judicial Interpretation lists certain situations in which the court
can identify the causation relationship between false statements and damage:138
(1) The investment of the investor refers to securities directly related to
false statements;
(2) (2) the investor purchases the securities on the implementation date
of false statements or thereafter, and before the exposure or
correction date or theretofore; or
(3) (3) the investor suffers damage due to selling or continually holding
the concerned securities on the exposure or correction date of the
false statement or thereafter.
In addition, Article 19 of the 2003 Judicial Interpretation lists certain exceptional
situations under which the court cannot identify the causal relationship between false
statement and damage:139
(1) If the relevant securities have been sold by the plaintiff prior to the
exposure or correction date of the false statement;
intermediary agencies are also called expert’s liability for the false statement. See 《中华
人民共和国证券法》 [Securities Law of the People’s Republic of China] (People’s Republic of
China) National People’s Congress, 29 December 1998, arts 173; 《最高人民法院关于审理
证券市场因虚假陈述引发的民事赔偿案件的若干规定》 [Certain Provisions of the Supreme
Peopleʹs Court on Trial of Civil Compensation Cases Arising from False Statement in Securities
Market] (People’s Republic of China) Supreme People’s Court, 9 January 2003, art 27. 137 最高人民法院关于审理证券市场因虚假陈述引发的民事赔偿案件的若干规定》 [Certain
Provisions of the Supreme Peopleʹs Court on Trial of Civil Compensation Cases Arising from
False Statement in Securities Market] (People’s Republic of China) Supreme People’s Court,
9 January 2003, art 25. 138 Ibid art 18. 139 Ibid art 19.
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(2) if the investment is made by the plaintiff on or after the disclosure or
correction date of the false statement;
(3) If the investment is made by the plaintiff when he knows that the
statement is false;
(4) If the loss or part of it is caused due to other factors, such as the risk
of the securities market system; or
(5) If the plaintiff maliciously makes the investment and manipulates the
price of securities.
It is worth noting that the 2003 Judicial Interpretation does not provide a definition of
‘system risks of the securities market’ of art 19(4). In practice, the courts utilise
different criteria to deal with the loss arising from system risks of the securities
market. Take the example of He Zhang v Tianjin Bohai Chemical Industry Group;140 the
court dismissed this case on the ground that Bohai’s stock price change was the result
of external system risk of the stock market and there was no causation between the
plaintiff’s loss and the defendant’s false statement. This judgment is controversial.141
Cai examined civil cases of false statements, and found that judges deducted the loss
cause by market risks in five cases, but did not deduct market risks in three other
cases.142
Articles 18 and 19 of the 2003 Judicial Interpretation only deal with liabilities for
‘induced rising’ caused by false statements because there was no short selling
mechanism when it was enacted in 2003. 143 Articles 18(2) and 19(1) deal with
140 张鹤与银座渤海集团股份有限公司虚假陈述证券民事赔偿纠纷案》[He Zhang v Tianjin
Bohai Chemical Industry Group – False Statement Compensation Dispute Case], 山东省济南
市中级人民法院 [Shangdong Province Jinan Municipal Intermediate People’s Court,
People’s Republic of China], 济民二初字第 12号 [Civil Case No 12], 7 July 2004. 141 郑重[Zhong Zheng], 《ＳＴ渤海小股东一审败诉:是非曲直仍是谜》[Minority Shareholders
of ST Bohai lost the First Trial: The Reason Is a Riddle] (11 November 2004) 《财经时报》
Provisions of the Supreme Peopleʹs Court on Trial of Civil Compensation Cases Arising from
False Statement in Securities Market] (People’s Republic of China) Supreme People’s Court,
9 January 2003, art 33. Article 33 lists four methods for determining the ‘benchmark date’:
(1) from the date of disclosure or alteration to the date on which the accumulative turnover of
securities affected by such false representation is up to 100% of negotiable parts of such
securities. The turnover of securities that are transferred under large transaction
agreement shall not be calculated.
(2) as the 30th day after the date of disclosure or alteration in the case that the benchmark
date cannot be determined according to the provisions set forth in the preceding item
prior to sessions.
(3) as the trading day directly before delisting day in the case that such securities exited
from securities transaction market.
(4) as the trading day directly before the suspension day in the case that such securities
suspend securities transactions, or in accordance with the provisions set forth in Item (1)
of this Article in the case that the transactions are resumed.
129
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Electronics Co Ltd,159 the Qingdao Intermediate Court decided that the exposure date
was December 18, 2001, when the trading turnover was 100% of the transferable
stocks.160 In Wei Chen et al v Hisense Kelon Electrical Holdings Co Ltd,161 the Guangzhou
Municipal Intermediated Court decided that 4 April 2003 was the implementation
date of the defendant’s false statement and 14 July 2005 was the benchmark date to
calculate the loss of investment balance. The court determined that the plaintiff
Chen’s actual loss was ￥15,026.23, including his loss of investment difference, stamp
duty, commission and interest. After deducting the loss of ￥4,391.11 arising from
system risk (referring to the ShenZhen Stock Exchange Component Index), the
compensation amount obtained by the plaintiff was ￥10,635.162
B Private Litigation of Insider Trading
Inside information has two basic meanings. First, inside information may be ‘price
sensitive information’.163 In SEC v Texas Gulf Sulphur Co,164 a jury verified the price
sensitive information. Second, inside information may be ‘material’ non‐public
159 曹小妹等诉烟台东方电子信息产业股份有限公司》[Xiaomei Cao et al v Yantai Dongfang
Electronics Co, Ltd], 山东省青岛市中级人民法院 [Shandong Qingdao Municipal
Intermediate People’s Court], 2007. 160 In the case of Dongfang Electronics Co Ltd, there are a few exposure dates. One is
September 14, 2001, when the Securities Daily issued the report of Dongfang Electronics Co
Ltd: Are Its Financial Data True? Another date is October 12, 2001, when China Central TV
broadcast about it. See 岳敬飞[Jingfei Yue], 《东方电子百起诉讼下月青岛集中庭审》[A
Hundred Securities Litigation against Dongfang Electronics Co Ltd Will Open the Court Session
Next Month in Qingdao] (18 August 2006) 中 国 证 券 网 [China Securities Net]
<http://www.cctvcom/financial/20060818/100963.shtml>. 161 陈卫等诉海信科龙电器股份有限公司诉讼案》 [Wei Chen et al v Hisense Kelon Electrical
Holdings Co, Ltd], 广东省广州市中级人民法院 [Guangdong Province Guangzhou
Municipal Intermediate People’s Court, People’s Republic of China], 2009. 162 刘俊海,宋一欣[Junhai Liu and Yixin Song] ed., 《中国证券民事赔偿案件司法裁判文书汇编》
The Court’s Judgments Collection of Civil Compensation Cases in Securities in China (北京大学
出版社 [Peking University Press], 2013), 260–62. 163 ‘Price sensitive information’ means information significantly affecting the price of a
company’s securities. For example, the Securities and Future Commission (SFC) uses
‘insider information’ to refer to ‘price sensitive information’. See ‘Background to the
Guidelines’ of the Consultation Paper on the Draft Guidelines on Disclosure of Insider
Information issued by SFC in March 2010, available at:
<http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=10CP2>. 164 401 F 2d 833 849 (2d Cir, 1968) (en banc), cert. denied, 394 US 976 (1969).
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information. 165 The PRC Securities Law (1998) defines ‘inside information’ as
‘information that concerns the business or finance of a company or may have a major
effect on the market price of the securities thereof and that hasn’t been publicised in
securities trading’.166 In accordance with China’s securities law, some ‘major events’
concerning investment, assets, liabilities, rights, interests or business achievements of
the company, important personnel changes and litigations shall be regarded as
‘inside information’.167
The PRC Securities Law (1998) defines ‘insider’ as a person ‘who has access to any
insider information of securities trading or who has unlawfully obtained any insider
information …’ Such a person ‘is prohibited from taking advantage of the insider
information he holds to engage in any securities trading’.168 In addition, in September
2007, the CSRC announced and enacted the Guidance on Determination of Insider
Trading Activities in Securities Market (Trial Implementation),169 now in force for some
time. These methods define the scope of insiders and inside information in the
Chinese context. It also stipulates the means by which the value of illegal proceeds is
calculated.170 The benchmark price of said securities shall be the market value at a
certain trading date or the average price of a certain period after the inside
information is released. The Supreme People’s Court may refer to the CSRC’s criteria
when enacting its judicial interpretation on relevant civil compensation.
The first civil case in China concerning insider trading, Ningfeng Chen v Jianliang
Chen,171 was accepted by the Nanjing Intermediate People’s Court in July 2008. Only
four private securities cases concerning insider trading or the divulging of inside
information were concluded in China by the beginning of 2013. Of the four cases, the
plaintiff Ningfeng Chen withdrew suit, whereas other cases, Zuling Chen v Haishen
165 See generally TSC Industries, Inc. v Northway, Inc. 426 US 438 (1976). 166 中华人民共和国证券法》 [Securities Law of the People’s Republic of China] (People’s Republic
of China) National People’s Congress, 29 December 1998, art 75. 167 Ibid art 67. 168 Ibid art 7. 169 证券市场内幕交易行为认定指引(试行)》［Guidance on Determination of Insider Trading
Activities in Securities Market (Trial Implementation)］ （People’s Republic of China）
China Securities Regulatory Commission, 27 March 2007. 170 Insider’s proceeds = (Income from sold securities + Value of holding securities) ‐ Costs of
buying securities. 171 陈宁丰诉陈建良诉讼案》[Ningfeng Chen v Jianliang Chen],北京市第一中级人民法院[The
First Intermediate People’s Court of Beijing Municipality, People’s Republic of China], 一
中民初字第 8217号[Civil Case No 8217], 22 October 2009.
131
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Pan, 172 Yan Li v Guangyu Huang173 and Yi Wu v Guangyu Huang,174 were dismissed by
the courts on the ground of lacking sufficient factual and legal basis. Liu compared
criminal, administrative and civil securities cases concerning insider trading from
2007 to the beginning of 2013 and found that:
(i) From 11 criminal cases, judicial authorities confiscated illegal income
of ￥255.64 million and imposed fines or penalties of ￥71.302
million;
(ii) from 35 administrative cases, the CSRC confiscated illegal income of
￥4.214 million and imposed fines or penalties of ￥9.998 million; but
that
(iii) no individual investor has yet received compensation in a civil
insider trading case.175
Liu’s findings indicate that, compare with an insider’s criminal liability and administrative liability, the enforcement of civil compensation was weak. However,
in December 2013, the Shanghai Second Intermediate People’s Court accepted the
case of Jufen Bao v Everbright Securities Co Ltd176 This may become the first case in
172 陈祖灵诉潘海深诉讼案》[Zuling Chen v Haishen Pan],江苏省南京市中级人民法院[Jiangsu
Province Nanjing Municipal Intermediate People’s Court, People’s Republic of China],宁
民二初字第 136号 [Civil Case No 136], 2008. 173 李岩诉黄光裕内幕交易案》[Yan Li v Guangyu Huang], 北京市第二中级人民法院[The
Second Intermediate People’s Court of Beijing Municipality, People’s Republic of China],
2012. 174 吴屹峰诉黄光裕内幕交易案》[Yifeng Wu v Guangyu Huang], 北京市第二中级人民法院[The
Second Intermediate People’s Court of Beijing Municipality, People’s Republic of China],
2012. 175 The four cases are Ningfeng Chen v Jianliang Chen, Zuling Chen v Haishen Pan, Yan Li v
Guangyu Huang, and Yifeng Wu v Guangyu Huang. See 刘康喜[Kangxi Liu], 《证券内幕交
易民事赔偿制度浅析——以行政责任、刑事责任与民事责任比较分析为视角》[‘A Brief
Analysis on Civil Compensation System of Securities Insider Trading: from the Perspective of
Comparing Administrative, Criminal and Civil Liability’] (2013) 中国证券[China Securities]
[Tribune of Political Science and Law: Journal of China University of Political Science and
Law] 139, 139–49. 192 最高人民法院关于行政诉讼撤诉若干问题的规定》 [Provisions of the Supreme People’s Court
on Issues Concerning the Withdrawal of Charges in Administrative Proceedings] (People’s
Republic of China) Supreme People’s Court, 14 January 2008, art 1.
138
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(i) The application for withdrawal of the suit represents the true
intention of the plaintiff;
(ii) the changes made by the defendant to the alleged specific
administrative action do not violate the prohibitive provisions of the
laws and administrative regulations, do not exceed or waive its
functions, and do not damage the public interests and legal rights
and interests of others;
(iii) the defendant has changed or decided to change the alleged specific
administrative action, notified in writing to the People’s Court; or
(iv) no objection has been raised by any third party.193
This judicial interpretation is intended to establish more effective relationships with
checks and balances between the trial court, the administrative subject and the
subject of the administrative act.
Judicial review should help to boost legal transparency and enforcement concerning
securities litigation in China. As an effective supervisory mechanism to restrict over‐
expanded administrative power, judicial review could facilitate the ‘impartiality and
transparency’ of law enforcement. As an attempt to delineate the boundary of judicial
regulation and administrative regulation, Hainan Kaili Central Development and
Construction Co Ltd v CSRC is of great significance,194 not only because it represents
the first time that the CSRC failed in its defense, but also because the trial court
reviewed the CSRC’s stock issuance system. Thus, this case sets a good example for
the transition from an administrative‐oriented to an ‘administration + court’
regulatory system.
193 Ibid art 2. 194 海南凯立公司诉中国证监会案》[Hainan Kaili Central Development & Construction Co, Ltd
(Kaili) v CSRC], 北京市第一中级人民法院 [First Intermediate People’s Court of Beijing
Municipality, People’s Republic of China], 一中行初字第 118号 [Administrative Case No
118], 8 December 2000. See also 林民华, 胡华峰, 崔文俊 [Minhua Lin, Huafeng Hu and
Wenjun Cui], 《GATS 与证券行政案件几个问题的探讨》 [‘Discussion on GATS and
Several Issues in Administrative Cases of Securities’] (2003) 21(6) 《政法论坛‐中国政法大
学学报》 [Tribune of Political Science and Law: Journal of China University of Political Science
and Law] 139, 139–49.
139
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C Judicial Interpretation
As a traditional civil law country, judicial interpretation was not initially an official
legal resource in China. However, as a result of the development of legal practices
over the past two decades, judicial interpretation now plays an increasingly
important role in applying or even making law. The Resolution of the Standing
Committee of the National People’s Congress Providing an Improved Interpretation of the
Law described the division195 between the legislature and judiciary.196 The Standing
Committee of the National People’s Congress has the right to enact stipulations by
means of decrees. It also takes responsibility for providing interpretations if the laws
and decrees themselves need to be further defined or additional stipulations need to
be made. At the same time, the Supreme Court is responsible for making
interpretations related to the specific application of laws and decrees in court trials.197
The Provisions of the Supreme People’s Court on the Work Concerning Judicial
Interpretation (2007) clarifies the nature, effect, classification, and procedure of judicial
interpretation.198 It stipulates that judicial interpretation made and enacted by the
Supreme People’s Court shall have legal effect.199
Additionally, the Provisions on Banning the Entry into the Securities Market (2008)
prescribes that the power to make judicial interpretations on specific issues
concerning the application of law in trial work of the People’s Courts shall remain
with the Supreme People’s Court.200 Judicial interpretation by the Supreme Court
shall include the stages of project initiation, drafting and filing, discussion,
promulgation, implementation and reporting for the record.201 The research office of
the Supreme Court is responsible for project initiation, examination, approval, and
also the coordination of judicial interpretations. The Supreme Court supervises the
application of its interpretations in the trials in all local People’s Courts and specific
courts; the upper level People’s Courts supervise the application of judicial
195 See 《全国人民代表大会常务委员会关于加强法律解释工作的决议》 [Resolution of the
Standing Committee of the National People’s Congress on Reinforcing the Legal Interpretation]
Standing Committee of the National People’s Congress, 10 June 1981. 196 Ibid. 197 Ibid art 1–2. 198 See 《最高人民法院关于司法解释工作的规定》 [Provisions of the Supreme People’s Court on
the Work Concerning Judicial Interpretation] (People’s Republic of China) Supreme People’s
Court, 9 March 2007. 199 Ibid art 4. 200 Ibid art 2. 201 Ibid art 9–26.
140
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interpretations in lower level People’s Courts.202 Since case decisions do not have an
official legal status in China, judicial interpretations are playing an increasingly
important role in trials. Since there were no judicial interpretations relating to insider
trading and market‐price manipulation, these kinds of civil claims could not be filed
in courts until 2007.
To some extent, the judicial interpretations of the Supreme People’s Court serve as a
bridge between statutes and precedents, and partially fulfil the function of case law.
However, judicial interpretation cannot completely replace case law. Although the
2003 Judicial Interpretation resolved the difficulty investors had in filing civil actions, it
cannot deal with all the specific circumstances of individual cases.
On occasion, the Supreme People’s Court goes a little far in using the power of
interpretation. The CSRC submitted the Guidance on Determination of Insider Trading
Activities in Securities Market (Trial Implementation) 203 and the Guidance on
Determination of Manipulating Activities in Securities Market (for Trial Implementation)204
to the Supreme People’s Court in 2007. The Supreme People’s Court will enact its
relevant judicial interpretations related to insider trading and market manipulation.
Those involved in these violations may be banned from the stock market.205 In that
circumstance, this judicial interpretation actually serves as quasi‐legislation.
D Judicial Independence
Many Chinese scholars believe that the lack of judicial independence, government
intervention, and the influence of interest groups all result in poor investor protection
in China.206 Additionally, there is a shortage of professional judges and poor judicial
202 Ibid art 28. 203 证券市场内幕交易行为认定指引(试行)》［Guidance on Determination of Insider Trading
Activities in Securities Market (Trial Implementation)］（People’s Republic of China）
China Securities Regulatory Commission, 27 March 2007. 204 市场操纵认定办法(试行)》[Guidance on Determination of Manipulating Activities in Securities
Market (Trial Implementation)]（People’s Republic of China） China Securities Regulatory
Commission, 27 March 2007. 205 See 《证券市场禁入规定》 ［Provisions on Banning the Entry into the Securities Market］
（People’s Republic of China） China Securities Regulatory Commission, 22 June 2008,
art 3. 206 栾天虹[Tianhong Luan], 《投资者法律保护的理论与实证研究》[Theoretical and Empirical
Research on Investors’ Legal Protection] (浙江大学出版社 [Zhejiang University Press], 2005)
181–4.
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governance. These are significant barriers that Chinese courts must overcome if they
are to provide effective investor protection.
Regarding the decision‐making process in securities litigation, trial judges are not
usually involved in judgments or verdicts. Apart from the judges of the collegial
panel, other people or organizations may participate in and influence adjudication,
including the director of the civil tribunal, the president or vice‐president of the
court, the corresponding higher level People’s Court, the Political & Legal Committee
and the local government.
A series of international documents, including the Universal Declaration on the
Independence of Justice (Montreal 1983), 207 the Beijing Statement of Principles of the
Independence of the Judiciary in the LAWASIA Region (1997),208 the Universal Charter of
the Judge (1999)209 and the Mt, Scopus International Standards of Judicial Independence 2008,210
establish certain basic requirements for the independence of courts and judges. The
Montreal Declaration on the Independence of Justice (1983) states that the independence
of judges includes substantive independence, personal independence and internal
independence. Substantive independence refers to conducting trials, making verdicts,
conducting procedural petitions, examining evidentiary effect and the competency of
evidence. 211 Personal independence requires that promotion, salary, retirement,
disciplinary and other matters concerning judges should not be under the control of
207 The Universal Declaration on the Independence of Justice (‘the Montreal Declaration 1983’),
adopted at the final plenary session of the first world conference on the independence of
justice held in Montreal (Quebec, Canada) on June 10th, 1983. 208 The Beijing Statement of Principles of the Independence of the Judiciary in the LAWASIA Region
(1997), first adopted at the 6th conference of Chief Justices held in Beijing in August 1997
and amended in Manila on August 28, 1997. 32 Chief Justices signed in Asian Pacific
Region by now. 209 The Universal Charter of the Judge was adopted at the meeting of the Central Council of the
International Association of Judges in Taipei, Taiwan on November 17, 1999. 210 The Mt Scopus International Standards of Judicial Independence was approved by the
International Association of Judicial Independence and World Peace in Jerusalem on March 19, 2008,
as amended in 2011 and approved in 2012.
211 See International Association of Judges, The Universal Charter of the Judge
<http://www.iaj‐uim.org/universal‐charter‐of‐the‐judges/>. Article 1 of the Charter notes
that ‘Judges shall in all their work ensure the rights of everyone to a fair trial. They shall
promote the right of individuals to a fair and public hearing within a reasonable time by
an independent and impartial tribunal established by law, in the determination of their
civil rights and obligations or of any criminal charge against them.’
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the administrative authority.212 Internal independence requires that judges remain
independent from their superiors and also higher courts.213 We can compare the
independence of judges in China with the criteria laid out by the Montreal Declaration
on the Independence of Judges (1983):
Criteria Set by the Montreal
Declaration on the Independence of
Judges (1983)
The ‘Independent’ Status of Chinese Judges
The Substantial
Independence
Judges should be independent in:
i. conducting trials;
ii. making judgments;
iii. conducting procedural petitions;
and
iv examining the evidentiary effect
and competence of evidence.
Judgments made by Chinese judges may be
restricted by:
i. the trial committee of the court;
ii. meetings of the court tribunal;
the approval system of the director of the
tribunal and/or director of the court;
iv the higher court and the judges of the higher
court;
v the influence on the judgment from the Politics
and Law Committee;
vi. the influence on the judgment from local
government; or
vii. Supervision from People’s Congress.
Personal
Independence
Judges should be independent from
the administrative authority in such
The nomination and appointment, salary,
promotion, security of tenure and judicial ethics of
212 See U.N. Basic Principles on the Independence of the Judiciary, (1985), art 11, Adopted by the
Seventh United Nations Congress and endorsed by General Assembly resolutions 40/32
of 29 November 1985 and 40/146 of 13 December 1985 and endorsed by General
Assembly resolutions 40/32 of 29 November 1985 and 40/146 of 13 December 1985, which
notes that ‘the term of office of judges, their independence, security, adequate
remuneration, conditions of service, pensions and the age of retirement shall be
adequately secured by law’. 213 See International Association of Judges, The Universal Charter of the Judge <http://www.iaj‐
uim.org/universal‐charter‐of‐the‐judges/>. Here it was noted that ‘the judge, as holder of
judicial office, must be able to exercise judicial powers free from social, economic and
political pressure, and independently from other judges and the administration of the
judiciary’.
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Criteria Set by the Montreal
Declaration on the Independence of
Judges (1983)
The ‘Independent’ Status of Chinese Judges
aspects as:
i. promotion;
ii. salary;
iii. retirement arrangements;
iv disciplinary measures;
v security of tenure; and
other matters concerning the
judges’ terms of employment
and personal arrangements
Chinese judges are stipulated by the Judges Law.
All these matters concerning judges are operated
by the Politics Department of the court in
accordance with the management model of
administrative staff in the administrative
authority. Promotion of judges is based on both
work performance and political criteria. The latter
criteria depend on their loyalty to CCP.
Internal
Independence
Judges should be independent from
their superiors or the higher court in
confirming the facts and applying
the law.
Chinese judges may consult the higher court
regarding major and difficult cases. Sometimes the
higher court may actively communicate with judges
on certain cases.
Figure 3: Independence of Judges: The Montreal Declaration and Judges in China
The independence of the judiciary includes the independence of courts and the
independence of judges. The independence of individual judges means judges
should impartially exercise their duties free from political interference or control of
any political party. Judicial committees have weakened the independence of courts
from administrative authority. Judicial committees are established at all levels of
Chinese courts, based on the principles of ‘democratic centralism’. Judicial
committees discuss important and difficult issues related to trials.214 Decisions of
judicial committees are binding on collegial panels of judges. Therefore, securities
lawsuits are generally controlled by three levels of judicial organisations: the collegial
panel of judges, the heads of civil tribunals, and judicial committees. Indeed, major
decisions relating to influential securities cases, such as litigation, are usually made
by judicial committees instead of judges hearing cases. In many Chinese courts,
judgments must be approved by judicial committees. The routine work of judicial
committees is led by the secretariat of the Politics and Law Committee in
214 中华人民共和国人民法院组织法》 [Organic Law of People’s Court of the People’s Republic of
China] (People’s Republic of China) National People’s Congress, 31 October 2006, art 10.
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government. Examination of practice reveals that judicial committees lack
transparency and that their work proceeds in a relatively arbitrary way. The
establishment of judicial committees, as the actual organ for trials, establishes a
hierarchical system of judgments or rulings in People’s Courts, and clearly affects the
independence of courts. This system of judicial administration and management
violates the independence of the judiciary. Consequently, some reform of the system
of judicial committees is essential.
In accordance with the PRC Civil Procedure Law, the judgments and rulings of the
second instance shall be final.215 Judgments and rulings of the first instance, if they
cannot be appealed according to law, or have not been appealed within the
prescribed time limit, can be final and effective.216 At the same time, China’s Civil
Procedure Law prescribes supervision of effective judgments and rulings. A retrial can
take place in the following circumstances:217
(i) the president of a People’s Court may exercise his or her discretion to
refer the case to the adjudication committee if they find definite
errors in a legally effective judgment or ruling rendered by the court;
(ii) the Supreme People’s Court may order a retrial conducted in the
Supreme People’s Court if definite errors are found in a legally
effective judgment or ruling rendered by a local court at any level, or
it may direct the People’s Court at lower levels to conduct a re‐
adjudication;
(iii) a party who believes that a legally effective judgment or ruling
contains errors may petition the People’s Court at the next level for a
retrial without suspending the judgment or ruling during the retrial
period; or
(iv) the people’s congress at the corresponding level may conduct a
retrial. Although retrials are uncommon, the existence of supervision
may theoretically lead to an endless inquiry of effective
adjudications. There should, therefore, be the times limits regarding
the initiation of retrials.
215 中华人民共和国民事诉讼法》[Civil Procedure Law of People’s Republic of China] (People’s
Republic of China) National People’s Congress, 9 April 1991, amended in 2008 and 2013,
art 158. 216 Ibid art 141. 217 Ibid art 177 and 179.
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Two main factors thwart judicial independence: first, the highly administrative
management of People’s Courts; and secondly, local protectionism, which leads to
interference in the judiciary. Unlike many common law countries, the management of
the People’s Courts is very similar to China’s administrative organisations.
Localisation seriously affects the impartiality of the securities adjudications, too.
Court jurisdictions follow China’s administrative divisions. Local government at
various levels of the administrative regions may exert considerable influence on
courts in corresponding jurisdictions; this includes influencing decisions relating to
the personnel of courts, budgeting, or to the management of specific trials. For
example, the heads of politico‐legal committees of local government can be involved
directly or indirectly in decisions related to court personnel, and also provide
instructions on individual cases. According to the stipulated jurisdiction in relation to
securities disputes, many important securities disputes are handled by the People’s
Court at the abode of the defendant. Some defendants have made use of their
‘geographic and networking advantages’ to exert pressure on the trial court. In the
case of Zaoding Yan et al v Guang Xia (Yinchuan) Industry Co Ltd,218 the Yinchuan
Intermediate Court made many decisions on filing, compensation, and enforcement
in favor of the defendant. Another typical case involving local protection was the
case of Mr. Wang v Hubei Jianghu Ecology Co Ltd, previously named as ‘Hubei Lantian
Company Limited’).219 Protected by local government, the accused was never listed
as the defendant by the local court. In many cases, maladministration and local
protectionism seriously impair the exclusive competence of People’s Courts and
undermine the independence of courts.
In summary, the courts should play a more active role in reforming the relevant legal
infrastructure in a situation of legislative supremacy, over‐expanded administrative
power, and a relatively weak judiciary. This legal reform can further reshape current
regulation to develop an investor protection centered legal framework.
218 阎皂定等诉广夏（银川）实业股份有限公司》 [Zaoding Yan et al v Guang Xia (Yinchuan)
Industry Co, Ltd – False Statement Dispute Case], 宁夏银川中级人民法院 [Yinchuan
Intermediate Court], 2006. 219 王某诉湖北江湖生态农业股份有限公司诉讼案》[Mr. Wang v Hubei Jianghu Ecology Co, Ltd],
湖北省武汉市中级人民法院[Hubei Province Wuhan Municipal Intermediate People’s
Court, People’s Republic of China], 2007.
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VII CONCLUSION
Misappropriation by controlling shareholders is a common problem of corporate
governance all over the world, especially in legal systems that cannot provide
adequate protection for public shareholders. Unfortunately, Chinese courts, as the
last resort, have not been active in enhancing legal protection to public investors.
China’s legal infrastructure and enforcement are poor, allowing controlling
shareholders to easily manipulate actual control rights of listed companies and to
maximize their own benefits rather than those of investors. Statistics at the beginning
of this article indicate that Chinese courts have played a weak role in supporting the
victims of securities fraud. It is estimated that, so far, less than 10% of victims have
succeeded in gaining civil compensation through securities action in China.220 Legal
resources have not been put to good use to protect the interests of investors. Further,
failings of the current enforcement framework, such as inadequate, selective,
inefficient or ineffective enforcement make things even worse. ‘A right without remedy
is not right’.221
China’s courts held a passive attitude towards securities litigation prior to 2002. That
changed, however, in early 2003 with the emergence of the policy of ‘civil
compensation for false statements’ subsequent to the Supreme People’s Court
issuance of the Notice of Certain Issues on the Admission of Civil Tort Dispute Cases
Concerning False Statements in the Securities Market. In 2006, the Supreme People’s
Court further decided that civil compensation for securities frauds was a crucial
research project. Chinese courts still need to accumulate experience in the calculation
of loss, causation of loss and fraud, and litigation procedures for securities frauds.
This article provides the following proposals in improving relevant judicial
governance:
(i) the removal of the outdated ‘procedural prerequisite of securities civil
litigation’; (ii) the introduction of class action and a reverse in the burden of
proof in private securities actions; and (iii) the enhancement judicial
